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India Ratings and Research (Ind-Ra) is India's Most Respected credit rating agency committed to providing the India's credit markets with accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open & balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade gaining significant market presence in India's fixed income market.
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The government has proposed a compensation mechanism for existing renewable energy projects, which will protect the cash flows to an extent from grid curtailments says India Ratings and Research (Ind-Ra). Ind-Ra believes that if the proposal is adopted this will also ensure a favourable operational environment for renewable energy projects. The proposal if adopted will be positive for wind and solar energy developers.

The absence of clarity on two possible reasons for grid
curtailment - ‘low system demand’ and ‘grid security’- could however pose new
challenges for developers. Further clarity by the authority/utilities to define
the terms and spell out when these measures will need to be opted for could
allay possible apprehensions of the developers and make the process more transparent.

At the conference
of Power, Renewable Energy and Mines Ministers of States and UTs held on 3-4
May, 2017 the same was proposed as the framework for awarding compensation for
existing renewable projects in case of grid curtailment. The provision for
curtailment is proposed to be applicable only to renewable power plants providing
day-ahead forecast and schedule. The compensation is suggested to be part of
the PPA provision for future projects. Decisions on curtailment are recommended
to be made on considering the balancing cost for accepting renewable energy in
the grid, where major balancing cost will be additional cost to run thermal
plants below their technical limits. For existing projects, the compensation
mechanism may be notified by the respective Electricity Regulatory Commission.

The
recent reverse auction of 750MW solar capacity in Rewa solar bid included the provisions
for compensation for deemed generation in case of curtailment. The recommended
PPA format for future wind and solar projects should also include provisions
for curtailment compensation.

In
the proposed framework, it is unclear which situations will be
identified as low system demand incidences, since the network operators have
the option to shut down a thermal plant which is falling below its technical
minimum operating level. For example, Tamil Nadu discom reportedly shuts down
one or two of the state owned thermal plants during high wind season to enable
full evacuation of wind power generation. There is a possibility of utilities
taking refuge under the low system demand and curtail high costs renewables to
save costs leading to reduced cash flows. Ind-Ra believes that utilities should
project demand for the next six months to one year along with definition of low
system demand for example a 15% dip from the projection and that could be defined
as low system demand. This transparent process could allay the fears of developers
when actually the demand plummets.

Ind-Ra
believes that the compensation to renewable projects will incentivise grid
operators and distribution utilities to reduce curtailments, will benefit renewable
energy developers in scheduling and forecasting and enable integration of
increasing renewable energy capacity. In FY17, grid curtailment was prevalent
for wind projects in Rajasthan (up to even 45% energy curtailed compared to P90
plant load factor) and solar projects in Tamil Nadu.

The
falling levelised cost of energy of renewable energy in the current national
energy surplus situation fuels the debate of gaps in implementation of
“must-run status” of renewable energy compared to merit order dispatch of
conventional energy. “Must run status” of renewable projects emanates from
India Electricity Grid Code notified by the Central Electricity Regulatory
Commission and adopted by the State Electricity Regulatory Commissions.

The
share of renewable energy in the Indian power market is set to rise, given the
projected renewable capacity addition.

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